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B.C.'s energy sector confronts big opportunities, big risks

Video collection: 2035 Energy

Big opportunities, big risks, big headaches.

All three loom as gas and oil producers, utilities, politicians, voters and others at all levels wrestle to impose a sense of order on an energy sector boom that’s expected to reshape the economic landscape not only in British Columbia, but around the world.

Over the last five years, sophisticated new methods of drilling for natural gas have opened up vast new reserves in North America, and this technology will lessen the control a handful of non-democratic nations have had on the global gas supply.

Senior analysts are suggesting the emergence of a global trade in liquefied natural gas, or LNG, will even weaken the grip Saudi Arabia and other producers have over the world price of oil, as gas becomes a popular and efficient substitute.

British Columbia could play a role in that shift, but it won’t be easy.

Gas that was $14 US a unit on North American bulk commodity markets in 2005 — amid expectations that North America was running out of gas — is today about $2.50 a unit. The B.C. government’s natural gas royalty revenues have plunged from a record $1.9 billion for fiscal 2005-06 to a projected $381 million in 2011-12.

Across Canada, total gas industry revenue has plummeted to $10 billion a year from $50 billion over the same time period thanks to a continentwide production glut.

The key to rebuilding that revenue is cultivating export markets in small, resource-poor, industry-rich nations such as Japan and South Korea — which look at natural-gas generation as the most reliable alternative to more risky nuclear power.

In late 2011, Japan was paying $17 US per unit for import LNG, which is why producers such as Encana, Apache and Shell are anxious to get B.C. gas onto tankers headed for Asia.

So far, six LNG export projects have been proposed, concentrating mostly at the deepsea port of Kitimat.

Beyond natural gas

In B.C.’s energy sector, natural gas is just one part of a complex debate.

Also in the mix are BC Hydro’s proposed $8-billion Site C dam on the Peace River and the controversy-laden application by Calgary’s Enbridge to build an oil pipeline that would carry synthetic crude from Alberta’s oilsands across B.C. to Kitimat for international delivery. All the discussions are manifestations of big, expensive changes sweeping the energy sector around the world.

North America’s electricity transmission grid alone, for example, needs at least $1 trillion in new investment by 2030.

Muriel McGrath, power and utilities section leader for KPMG Canada, calculates an average Canadian worker will need to pay at least $850 per year to support electricity infrastructure development through 2030.

Peter Tertzakian, chief energy economist at ARC Financial Corp., perceives the changes as the biggest in at least half a century.

“The 1950s and ’60s was the era where our oil and gas industry started to grow in a meaningful way and the investment in infrastructure really started to take off. Those were the years where the big pipelines were built, post World War Two, as North America began to industrialize, mobilize, urbanize, get wealthy, that whole dynamic,” Tertzakian said from his Calgary office.

“Really massive changes are going to continue throughout this decade,” he continues. “By the end of the decade you’re going to see a completely new set of supply chains and infrastructure put into place that reflect all these changes.”

BC Hydro has always given B.C. an edge in electricity trade with the U.S. because its hydroelectric facilities can respond more quickly to price increases on trading markets compared to thermal plants fired by gas or coal. But Tertzakian said B.C. has the potential for a huge competitive advantage in gas exports over Pacific Rim competitors such as Australia and the U.S.

“We have had to endure low gas prices here for now probably four years and especially the last year. It has made our Canadian gas industry, and certainly the industry in B.C., lean and mean. We’ve had to use innovative processes, have a lot of cost discipline — so we will enter that market as one of the lower-cost producers. The Australians’ costs are out of control. They’re effectively going through what the oilsands went through in 2005 to 2008, from what I can read,” Tertzakian said.

B.C. has a significant geographic advantage over American gas producers, who tend to be located east of the Rocky Mountains.

“We’re way closer,” he said.

“They have to go down through the Panama Canal, the bulge of the equator, and all the way up. We have at least a $2-per-unit advantage. We should be making hay out of that.”Canadian gas producers are making almost nothing by selling into an over-supplied U.S. market, but without LNG facilities the gas is essentially stranded in North America. Tertzakian said offshore buyers are willing to pay higher prices for a secure energy supply and perceive natural gas as a lower-emission replacement for coal-fired generation.

“This industry at the moment is dying,” Tertzakian said. “That is why these LNG terminals are so consequential. Not only is it dying, it’s also the fuel of the future in terms of mitigating carbon emissions. So what sense does that make — give it away for free and watch the business contract? Any other industry in Canada, if you were to tell people it went from $50 billion a year to $10 billion or less, it would be considered a national disaster.”

Oil remains dominant

The bigger story, Tertzakian emphasized, is oil.

“It represents about 90 per cent of the revenues of the [oil and gas] industry. It’s about $100 billion versus natural gas which is $10 billion.”

The only market to which Alberta has access for its oilsands crude is the United States, and it’s forced to sell into that market at a discount to U.S.-produced oil of the same quality. Earlier this year, that discount briefly rose above $30 a barrel and rarely drops below $15.

Enbridge and the oil companies its Northern Gateway project will support have calculated that by piping the oil to a Pacific port for transcontinental export, it can achieve price parity for its product in the U.S. and around the world.

“We’re really getting shortchanged, and leaving tens of millions of dollars a day on the table that B.C. could be participating in, that all of Canada could be participating in,” Tertzakian said.

“On the gas side there doesn’t seem to be a lot of [pipeline] opposition and that’s good, but I think we all need to recognize that it’s the oil side that’s really paying the freight. It represents about 90 per cent of the revenues of the industry ...

“I am very sensitive to the needs of everybody along the route, but we have to find balance and a sense of urgency — and not of complacency — in terms of our competitiveness, also recognizing how much this industry contributes to the well-being of all Canadians.

“For example, 25 per cent of the TSX is oil and gas companies, 30 per cent is finance companies like banks – but where do they get a significant portion of their revenue? It’s from financing oil and gas companies. Every pension plan in this country has a weighting in Canadian oil and gas. You can’t avoid it.”

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